Golden Cross: the moving average strategy that defines trend changes in long-term assets

In trading, there are countless approaches, each tailored to different needs depending on the chosen timeframe and profitability objectives. Some traders seek quick gains through scalping with short EMAs (7 and 14) on minute charts, while others prefer swing or investment positions that require long-term indicators such as 50, 100, or 200-period EMAs on hourly or daily timeframes.

Among all available technical analysis tools, the Golden Cross stands out as a particularly effective indicator for identifying trend changes in assets with sustained movements. Its long-term implementation yields solid results especially in stocks, stock indices, and commodities, although it can also be adapted to other markets like Forex currencies.

▶ The Mechanism of the Golden Cross Explained

The Golden Cross operates based on a simple yet powerful concept: the intersection of two simple moving averages (SMA) of different periods. When a short-term moving average crosses above a long-term one, it generates a confirmation signal indicating a shift from a bearish to a bullish market.

The dynamic works as follows: in a downtrend, selling pressure diminishes and both averages begin to converge. At the exact moment of the golden cross, the price shows renewed bullish momentum. Subsequently, retracements often find support at the short-term moving average, allowing the trend to continue until an opposite signal called the “Death Cross” appears.

The effectiveness of the Golden Cross is higher when applied to stocks and indices. If the indicator produces too many crossing signals, it loses reliability and may generate multiple false alerts. Therefore, it’s preferable to work with few genuine crosses that offer higher probability of success, rather than chasing every secondary movement.

▶ Simple Moving Averages: The Foundation of Analysis

Before trading, it’s essential to understand what moving averages are. They are continuously calculated values representing the average price over a specific period. There are various types: simple, exponential, and weighted. The most used are the SMA (Simple Moving Average) and the EMA (Exponential Moving Average).

The Simple Moving Average (SMA) calculates the arithmetic mean of closing prices over a set number of periods. For example, a 5-day SMA takes the closing values of the last 5 sessions, sums them, and divides by 5 to plot a point on the chart.

In a trading platform, setting the MA indicator with Length 1 makes the line exactly follow each candle’s close, reflecting a one-day average. Increasing this value to 5 averages the last 5 days, smoothing out volatility and revealing the true direction of the movement.

This indicator helps identify the asset’s trend and allows for clearer prediction of potential market changes compared to analyzing raw price data without smoothing.

▶ Recommended Values: 50 and 200-Period SMAs

The standard configuration for the Golden Cross uses two specific moving averages: the 50-period and the 200-period. This choice is not arbitrary but the result of years of empirical analysis by technical market experts.

It’s important to note that analysis should be performed on daily timeframes. Using 1-hour charts, the 200 SMA would be calculating averages over 200 hours, distorting the intended signal.

Why these specific values?

The 200-period SMA is extremely powerful in the long term, as it analyzes roughly the asset’s behavior over the past year. It represents strong, sustained movements. The 50-period SMA evaluates the past 2 months. When the price in 50 days surpasses the 200-day average, it’s a very solid indication of a trend reversal to the upside.

Using shorter periods like 15 and 50 would generate excessive golden crosses, most of which lack real validity. The goal is to have reliable signals, even if few, rather than a flood of false opportunities.

▶ The Golden Cross: Long-Term Investment by Nature

This strategy is explicitly designed for long-term trades with horizons of months or even years. Although some short-term traders may find confluences using the 50 SMA as support, that is not the primary purpose of this model.

Using moving averages on 15-minute or shorter timeframes is neither reliable nor recommended, as it completely distorts the actual asset cycles.

▶ Practical Application: Case Study with the S&P 500

To understand how the Golden Cross works in action, let’s analyze the S&P 500 index. Its last significant golden cross occurred in July 2020, when the index was trading at 3,151.1 USD. At that moment, traders should have opened buy positions.

Over the following months, the asset steadily rose. The 50 SMA acted as a less precise support, while the 200 SMA proved highly effective in containing corrections.

In January 2022, the candles definitively broke below the 200 SMA support, with the index at 4,430 USD. This was the optimal moment to close the position. With a single buy, gains of 1,278.9 USD in 18 months could have been realized.

Later, in March 2022, a “Death Cross” appeared when the S&P 500 traded at 4,258.6 USD, signaling the start of a bear market. Currently, traders await the next golden cross to re-enter buy positions.

Chart lessons: During the bullish trend, there were approximately 14 attempts to break the 50 SMA. In 4 cases, these movements caused significant losses. This demonstrates why it’s critical to complement the Golden Cross with other technical tools like Fibonacci retracements, support/resistance levels, and confluence analysis, avoiding trading based solely on this indicator.

▶ The Death Cross: The Opposite of the Golden Cross

The “Death Cross” is exactly the opposite: when the 50 SMA crosses downward through the 200 SMA. Contrary to what the name suggests, it’s not inherently bad; it opens opportunities to trade short positions and capitalize on sustained downtrends.

However, this cross is more effective in Forex currencies and cryptocurrencies than in stocks and indices, as stock markets tend to trend upward historically. A Death Cross in the S&P 500 generally only signals closing previous long positions, not initiating new sales.

There are misleading Death Crosses that quickly revert to an uptrend, while in pairs like GBPUSD, they can be effective and indicate real changes. Confirming with additional confluences is essential.

▶ Real Limitations and Improving Effectiveness

No indicator or trading strategy is 100% accurate. The Golden Cross, while effective, can generate false signals if not properly complemented.

To significantly improve effectiveness:

• Seek confluences: combine the golden cross with other technical indicators, support/resistance levels, and Fibonacci levels
• Use longer periods: employ even longer SMAs (such as 300 periods) if the assets allow; longer analysis periods = more reliable data
• Choose appropriate assets: focus on those with very stable trends that generate few crosses
• Fundamental analysis: complement technicals with news, earnings reports, and macroeconomic changes
• Consider costs: for long-term positions, overnight interest and financing fees accumulate, impacting profitability

▶ Conclusion

The Golden Cross is a simple yet powerful tool when implemented correctly with the 50 and 200-day periods recommended by experts. Its true strength lies in identifying durable trend changes in assets with sustained movements.

Bear markets offer the best opportunities to capture authentic golden crosses and build long-term positions with high profit potential. The key is to wait patiently, confirm with multiple confluences, and avoid the temptation to trade every signal generated by the indicator. If you plan to use this approach, thoroughly study your broker’s fee structure, as your positions may remain open for extended periods.